MACROECONOMIC DETERMINANTS OF AGRICULTURAL SECTOR GROWTH IN NIGERIA
The study examines the macroeconomic determinants of agricultural sector growth in Nigeria which is based on the empirical evidence of the short-run and long-run interrelationships among capital expenditure on agriculture, inflation rate, exchange rate, interest rate and credit availability to the sector using agricultural GDP as dependent variable. Time series data from 1981 – 2015 were sourced from Central Bank Statistical Bulletin. The data were analysed based on bound test form of cointegration and Auto Regressive Distributed Lag model was used to investigate the nature of the relationship among the macroeconomic determinants affecting Agricultural sector growth in Nigeria in the short run and long run.
The result of the bound test implies that there is a cointegration (long run relationship) between agricultural sector growth, interest rate, exchange rate, inflation rate, government expenditure on agricultural sector and credit to agricultural sector from commercial banks and therefore, the null hypothesis of no cointegration between the variables is rejected and the alternative hypothesis is accepted. The ARDL shows all the variables have negative relationship with agricultural sector growth while credit available to agriculture has a positive relationship with the Agricultural sector growth in the short run. In the long run, the nominal exchange rate has a positive relationship with agricultural sector growth while other macroeconomic variables have a negative relationship with agricultural sector growth
It is therefore recommended that the Nigerian government should double its efforts in designing sector-specific agricultural policies that will facilitate improvement in the quality of the institution, long-term sustainable government expenditure in agriculture, maintenance of favourable exchange rate and commercial banks’ credit accessibility to farmers at low interest rate. These will act as incentives to farmers for increased agricultural production in Nigeria which will lead to the growth of the Agricultural sector.
TABLE OF CONTENTS
Title page i
Table of contents vi
CHAPTER ONE: GENERAL INTRODUCTION
1.1 Introduction to the study 1
1.2 Statement of the problem 2
1.3 Research Questions 4
1.4 Objectives of the study 4
1.5 Justification of the study 4
1.6 Scope and Limitations of the study 6
1.7 Organization of the study 6
CHAPTER TWO: BACKGROUND TO THE STUDY
2.0 Introduction 7
2.1 Trend Analysis of Agricultural Sector Output in Nigeria 7
2.2 Trend Analysis of Interest Rate in Nigeria 8
2.2.1 Interest Rate Policy in Nigeria 9
2.3 Trend Analysis of Exchange Rate in Nigeria 9
2.3.1 Exchange Rate Policy in Nigeria 11
2.4 Trend Analysis of Inflation rate in Nigeria 12
2.4.1 Inflation rate in Nigeria 12
2.5 Trend Analysis of Government Recurrent Expenditure on Agriculture 13
2.5.1 Government Expenditure Programmes and Policies on Agriculture 14
2.6 Trend Analysis of Credit to Agricultural Sector 16
2.6.1 Credit Guarantee Schemes in Nigeria 17
2.7 Summary of the background to the study 19
CHAPTER THREE: LITERATURE REVIEW
3.1 Introduction 21
3.2 Theoretical Review 21
3.2.1 The Solow-Swan neoclassical growth theory 21
3.2.2 Endogenous Growth Theory 22
3.2.3 Rostow’s Theory of Economic Growth 22
3.2.4 Wagner’s Law 23
3.2.5 Export growth theory 24
3.3 Methodological Review 26
3.3.1 Method Employed in the Studies 26
3.3.2 Summary of the Methodological Review 27
3.4 Empirical Review 28
3.4.1 Summary of Empirical Review 34
3.4.2 Gaps in the Literature and the Contributions of the Study 35
CHAPTER FOUR: THEORETICAL AND METHODOLOGICAL FRAMEWORK
4.0 Introduction 36
4.1 Theoretical framework 36
4.2 Model Specification 39
4.3 Methodological framework 40
4.4 Scope and Sources of Data 42
CHAPTER FIVE: DATA PRESENTATION AND ANALYSIS
5.1 Descriptive Analysis 43
5.2 Unit Root Test 44
5.3 ARDL Bounds Test for Cointegration 46
5.4 Estimated Short run and Long run relationship 47
CHAPTER SIX: SUMMARY: CONCLUSION AND RECOMMENDATION
6.1 Summary 51
6.2 Conclusion 52
6.3 Recommendations 52
LIST OF FIGURES
Figure 1 Contribution of agricultural sector to GDP in Nigeria 8
Figure 2 Interest rate trend in Nigeria 9
Figure 3 Exchange rate trend in Nigeria 10
Figure 4 Inflation Rate trend in Nigeria 12
Figure 5 Government Recurrent Expenditure on Agriculture in Nigeria 14
Figure 6 Credit to Agricultural Sector trend from Commercial Banks 17
LIST OF TABLE
Table 5.1 Result of Descriptive test 44
Table 5.2.1 Result of Augmented Dickey Fuller Test 45
Table 5.2.2 Result of Phillips-Perron Unit Root Test 46
Table 5.3 Result of Bounds test 47
Table 5.4.1 Result of Short-run Model 49
Table 5.4.2 Result of Long-run Model 50
1.1 Introduction to the study
Agriculture in any economy is attached to various sectors and is important for achieving growth and it enhances development. Agriculture is necessary for the sustenance of life and it is the bedrock of a country’s economic development, especially in the supply of adequate and nutritious food so vital for the development of humans and industrial raw materials. Agricultural sector is a vital sector of the Nigeria economy which has a lot of potentials for the future development of the economy of a nation as it had done in preceding years (Okolo, (2004). Agriculture impacts a lot on the Nigeria economy in different ways and they include: the provision of food for the rising population, provision of raw materials to an infant industrial sector, a source of employment, generation of foreign exchange and provision of market for the agrarian sector (Okumadewa, 1997).
Available statistics shows that agriculture is the most important Nigerian economic sector in terms of its contribution to the Gross Domestic Product. The sector contributes about 26 percent to the country’s Real Gross Domestic Product, employs about 60% of the total population and provides employment to about 80% of the rural population. The statistics equally shows that agriculture is the major source of food and meat production (NBS, 2016). It is estimated that some 25 million hectares are cultivated each year by small holders for food production hence the sector plays an important role in rural livelihoods. It is approximated that agriculture accounts for about 70% of rural households total incomes (Ogen, 2004). The agrarian sector has a strong relationship with the economy; hence, concern for macroeconomic determinants and the economy.
Macroeconomic determinants are the strategies used by government to regularize investment in the national economy through the checking of macroeconomic factors such as interest rate, government spending, exchange rate, tax and money supply (Rahman, 2004). The macroeconomic tools that governments use are of particular importance in influencing the economy. Macroeconomic tools consist of fiscal tools, monetary tools and other tools that govern macro-prices. Fiscal tools deal with the level of government spending and the balance between taxation and spending. Monetary tools control the availability of money and access to credit. Researchers and economists believes that change in macroeconomic determinants often have substantial impacts on agricultural economy worldwide. Sustainable agricultural development is propelled by the macroeconomic determinants available in the country. The implementation of these determinants provides enabling environment for agriculture to grow paripassu with the other sectors. These determinants have great impact on the lucrativeness of the agricultural system and the welfare of farmers as they affect the flow of funds to the agricultural sector when it comes to subsides, credit, budgetary allocation, taxes and therefore must be in concordance and mutually reinforcing with the agricultural policies.
The Agricultural sector performance in Nigeria has been dwindling as a result of the macroeconomic policy distortions due to macroeconomic indicators, especially changes in interest rates and exchange rates (Ukoha, 1999). Developing countries are predicted to face a slowdown in agricultural growth resulting from the price intervention through trade, exchange rates, and other macroeconomic indicators (Schiff and Valdes, 1998). The country’s agricultural industry is vulnerable to risk and uncertainty. Agribusiness operators and farmers closely monitor changing prices, farm programmes, sales and weather patterns etc. to reduce their exposure to risk and uncertainty. However, most Agribusiness operators and farmers are less familiar with one of the major risk variables that can significantly affect the profitability of their business operations this is government policy. Although policymakers try to make policies that would make the national economy improve, these policies often have harmful and unintended effects on the agricultural economy, hence, policymakers , farmers and agribusiness operators must understand the policy process and the impact that changing macroeconomic determinants can have on agriculture. This cognition will put them in a better place to react strategically to anticipated changes in the macro economy.
1.2 Statement of the Problem
Agricultural producers and consumers are heavily influenced by macroeconomic determinants and these determinants have influence on the setting of the nation-wide policies. The Macroeconomic determinants that affect agriculture include monetary tools, fiscal tools, foreign exchange rate tools, factor price (interest, wage and land rental rates), natural resource and land use tools. Change in monetary, fiscal and trade tools affect the performance of the agricultural economy through their respective influence on input and other prices, land prices and exchange rate. The agricultural economy is very sensitive to changes in interest and inflation and thus monetary policy changes. Sound macroeconomic determinants are important to meet national development targets through agricultural development (Fan et al., 2008). Macroeconomic variables have serious economic and development implication for the sustenance of agricultural production and stimulation of export. Foreign exchange inflows have not only depreciated the value of Nigeria’s currency but have also eroded the competitiveness of domestic produced agricultural goods in comparison with low-priced imported goods, leading to a reduction in agricultural activities in the country (Fan et al., 2008). The exchange rate regime adopted during the Structural Adjustment Programme (SAP) neither has not resulted in any meaningful export of agricultural produce over time.
Literature has also reported that despite Nigeria’s rich agricultural resource endowment, there has been a down turn in agriculture's contributions to the nation's economy. The Agricultural sector had not performed to its desired level because of several decades of neglect from successive Nigerian government in creating appropriate macroeconomic policies that will cushion the effects of internal and external macroeconomic shocks on farmers’ incentives to produce (Manyong et al. 2005). In the 1960s, it was reported that agriculture accounted for 65% to70% of total exports. The export fell to about 40% in the 1970s, and crashed to less than 2% in the late 1990s. The decline in the agricultural sector was largely due to rise in crude oil revenue in the early 1970s.
For instance, less than 50% of the country’s cultivable agricultural land is under cultivation (Manyong et al. 2005). This is even as smallholder and traditional farmers, who use rudimentary production techniques with resultant low yields, cultivate most of this land. The smallholder farmers are constrained by many problems including those of poor access to modern inputs and credit, poor infrastructure, inadequate access to markets, land and environmental degradation, and inadequate research and extension services (Manyong et al., 2005). Also, the advert of the oil boom led to complete diversion of the citizens and national interests from agriculture as source of income. The citizens now loose interest in agricultural practices because it is treated as business for the less privileged and peasants in the rural areas etc. The repercussions are that agricultural practices has been deserted, hunger and poverty have taken over.
Ultimately, efforts to fortify the Nigerian agriculture have not yielded the required results in the sector. In recent times where traces of upward trend in agricultural output have been observed however, it was largely derived from the expansion of cultivated land and is not sustainable in the long run (Shenggen et al., 2008). Moreover, these recent traces of upward trend in agricultural output have not been able to trickle down to the poorest of the poor, and have neither helped the country tackle the problem of unemployment nor achieve her overarching goal of food security (Shenggen et al., 2008). Therefore, in order to achieve desired social and economic development in Nigeria through agriculture, the performance of agricultural sector to a very large extent depends on its macroeconomic determinants.
1.3 Research Questions
This study is directed at the following questions;
⦁ What are the impacts of the macroeconomic determinants on Agricultural sector growth in Nigeria?
⦁ What is the nature of the relationship between the macroeconomic determinants and Agricultural sector growth in Nigeria both in the short run and long run?
1.4 Objectives of the Study
This study is aimed at achieving the broad objective of investigating the impact of macroeconomic determinants on agricultural sector growth in Nigeria from 1981 to 2015. The specific objectives are as follows:
⦁ To estimate the impacts of the macroeconomic determinants on Agricultural sector growth in Nigeria.
⦁ To investigate the nature of the relationship in the first specific objective in the short run and long run.
1.5 Justification of the Study
This study is motivated by the important position that agricultural sector holds in the Nigerian economy. It is pertinent to note that there are lot of studies on the impact of macroeconomic determinants on the agricultural sector on countries like Ghana, Malaysia, Iran, United States, Romania, Tunisia, South Africa and Hungary. Enul and Attah-Obeng (2013), Shariff et.al (2015), Karbasi and Tavana (2008), Dehdashti and Mohammadi (2012), Marcu and Meghisan (2015), Letsoalo and Kirsten (2003), Bakues and Ferto (2015) but we have few studies focusing on Nigeria (Udensi, et al, (2012), Odior (2014), Aroriode and Ogunbadejo (2014), Brownson et al (2013), Eyo (2008) and Oluwatoyose et al (2013). Also, majority of the past studies reported positive relationship between some macroeconomic determinants and agricultural sector while few studies have also found negative relationship between some of the macroeconomic determinants and agricultural sector. (Udensi, et al, (2012), Kareem et al. (2013), Aroriode and Ogunbadejo (2014), Brownson et al (2013), etc.
It was discovered that none of these studies has been able to study the impact of each of these macroeconomic determinants on Agricultural sector in the short and long run using Nigeria as their case study. Aroriode and Ogunbadejo (2014) study was only on the impact of macroeconomic policy on Agricultural growth in Nigeria with their focus on interest rate, exchange rate, money supply and commercial loan to Agriculture but he did not study the impact of these macroeconomic variables on Nigeria’s Agricultural growth in the long run and short run. Umar et al. (2015) study was on the short and long run impact of macroeconomic variables on Agricultural sector in Malaysia using net export, inflation rate, interest rate, nominal exchange rate, government expenditure and money supply but Nigeria was not use as their case study. Odior (2014) research work was on the short run impact of some macroeconomic indicators which are: real money aggregate, exchange rate, nominal interest rate, inflation rate, agricultural sector credit and government expenditure on Agricultural performance in Nigeria but his study was not on the long run impact of these macroeconomic indicators on Agricultural performance in Nigeria.
In testing for the impact of the macroeconomic determinants on Agricultural sector, most studies focused mainly on Johansen cointegration test, which is only suitable when (i) all the variables are integrated of order one, that is, I(1) and (ii) when a system of equations is involved. To fill this gap, the present study would employ the Autoregressive Distributed Lag (ARDL) Bounds test as it has an advantage over other techniques including the Johansen test in terms of dealing with pure I(1) variables and a combination of I(1) and I(0) variables.
This study is meant to fill the gaps and contribute to the literature by studying the impact of each of these macroeconomic indicators (Interest rate, Exchange rate, Inflation rate, Credit to Agricultural sector and Government recurrent expenditure on Agriculture) in the short and long run on the growth of Nigeria Agricultural sector.
1.6 Scope and Limitations of the Study
The study aims at analyzing the macroeconomic determinants of agricultural sector growth in Nigeria with a time series data covering a period of 35 years (1981 to 2015). The scope is adopted due to data availability. The macroeconomic variables affecting the agricultural sector are numerous but data were not available for some variables making the research work to focus on the key macroeconomic variables whose data were available and those data available did not cover the range of the period under study. These variables include Foreign Private Investment and External Debt.
1.7 Organization of the Study
This research study is divided into six different chapters. Chapter one contains the introductory part of the study which comprises of the statement of the research problem, research questions, objectives of the research, justification of the study and the scope of the research. Chapter two contains the background to the study which consist of the trend analysis of interest rate, exchange rate, inflation rate, government recurrent expenditure on agriculture and credit to Agricultural sector in Nigeria within the study period. Chapter three deals with the literature review where the theoretical, empirical literature and methodological literature is considered. Chapter Four contains theoretical and methodological framework. Chapter five contains data presentation and analysis. Finally, chapter six captures the summary of findings of the study, conclusions, and recommendations for further studies..